Month: May 2008
CMT – CS
Acquisition of Atrium@Orchard
● CMT announced the proposed acquisition of Atrium@Orchard for S$839.8 mn (total acquisition cost S$850 mn) or S$2,249/sq ft. The acquisition is expected to be completed by end Aug 08, and will be integrated with Plaza Singapura (PS) to provide ~170m of prime retail frontage and a combined c.600,000 sq ft NLA of retail space.
● The acquisition is to be funded by S$650 mn CB issuance and MTN proceeds, implying a cash cost of debt of ~1.6% (using 1% coupon rate) to justify the low asset yield of 2.1% for a marginal yield accretion of +1.0% to our 08E DPU at injection. The average cost of debt of 2.75% (using assumed YTM 2.5%), however, implies a potential dilution of 3.0%. Despite that, the acquisition is for strategic reasons, in our view, both geographically and also to lift the yields of the two properties in synergy.
● We believe the attractiveness of the acquisition will pivot on the AEI pending announcement on details. Upon completion, CMT’s gearing will be lifted to 45% and is likely to raise equity for the acquisition of ION orchard in FY09, although ION will draw a greater appeal, we believe. For now, we maintain our estimates. We believe the acquisition will strategically enable CMT to have key presence in downtown core along four adjoining MRT stations (incl. ION Orchard), with Dhoby Ghaut station serving 3 MRT lines by 2010.
Office REITs – UOBKH
Positive news from MBFC
There are several positive developments for the office market. Just last month, Commerz Real, subsidiary of Germany-based Commerzbank, bought 71 Robinson Road for a record S$743.8m or S$3,125psf. The latest positive news relates to the new downtown and Marina Bay Financial Centre (MBFC).
Office space at MBFC is well taken up. The strength of the office leasing market can be seen from healthy take-ups at MBFC. Phase 1 with 1.6m sf and Phase 2 with 1.3m sf of office space will be completed in 2010 and 2012 respectively. Both phases are more than 50% pre-committed by major financial institutions. Standard Chartered has signed a 12-year lease for 508,300sf at MBFC Tower 1 with an option to extend for another eight years. DBS Bank has signed a 12-year lease for 700,000sf occupying 22 floors at MBFC Tower 3 (Phase 2). Other notable financial institutions include Wellington Investment Management, American Express, Barclays and Pictet.
More leases likely to be signed soon. According to industry sources, Standard Chartered and DBS signed at S$8 to S$10psf pm. This is a discounted rental rate due to the huge space taken and the long duration of lease terms exceeding 10 years. Most other tenants signed at between S$12 to S$15psf pm for 3-year leases. Smaller plots were even signed at S$18psf pm. According to industry source, an additional 15% of space at MBFC is in advance stage of negotiation. We see this as an important development. If successfully closed, this will bring the level of commitment at MBFC above 70%, bringing a boost to confidence in the office market. We estimate MBFC accounts for 34% of office supply coming on stream over the next four years.
CapitaCommercial Trust (BUY/S$2.39/Target: S$2.63)
• CCT is well positioned to benefit from positive rental reversion with 29.4% of its leases for office space up for renewal in 2008 and 2009.
• We estimate that the lease for HSBC Building was renewed at an average rental of S$8.50psf pm in early May, much higher than existing passing rent of S$3.63psf pm.
• CCT is the largest office REIT and provides a diversified exposure to the Singapore office market. It provides FY09 distribution yield of 5.66%.
K-REIT Asia (BUY/S$1.45/Target: S$1.81)
• K-REIT achieved average gross rent increase of 14% qoq to S$6.86psf pm in 1Q08 due to positive rental reversion from existing properties and full-quarter contribution from ORQ. It is well positioned to ride the upswing in office rentals with 24.2% of net lettable area (NLA) due for expiry and another 15.5% of NLA due for rent review in 2008 and 2009.
• K-REIT provides attractive 2009 distribution yield of 6.05%. This assumes that the balance of the bridging loan from Kephinance Investment is refinanced at a steep interest rate of 4.2%.
Suntec REIT (BUY/S$1.64/Target: S$2.10)
• Suntec Office Towers achieved committed occupancy of 100% with recent new leases signed at between S$11.50 and S$13.50psf pm. It is well positioned to benefit from positive rental reversion with 9.5% and 44.1% of its leases for office space up for renewal in 2HFY08 and FY09.
• Suntec REIT provides FY09 distribution yield of 6.16%.
CMT – UOBKH
Putting on the acquisition hat
CapitaMall Trust (CMT) has entered into a sale and purchase agreement with the Singapore Government to acquire The Atrium@Orchard at S$839.8m or S$2,249psf. The Atrium comprises two Grade A office towers of seven and ten storeys with ground floor retail space. It is zoned as a commercial development. It is located above the Dhoby Ghaut MRT interchange station and adjacent to Plaza Singapura, which is part of CMT’s portfolio. Dhoby Ghaut MRT station is served by North South Line, North East Line and Circle Line (ready in 2010). The acquisition is expected to complete by end-Aug 08.
Value creation through asset enhancement initiative (AEI). The Atrium will be amalgamated with Plaza Singapura to create an integrated development with 170m of prime retail frontage along Orchard Road and NLA of over 900,000sf. About 100,000sf of prime retail NLA on Levels 1 and 2 of The Atrium will be created by decanting lower yielding spaces. Management plans to utilise some of the additional retail space for duplex flagship stores fronting Orchard Road. Renovation works will be carried out progressively from 2009 to 2010. State land between the two buildings will be covered by shelters to create an “open plaza” concept. The AEI will also benefit Plaza Singapura by improving traffic flows from the MRT station.
Upside from positive rental reversion. Average office rental for The Atrium is expected to double from existing S$5.87psf pm to S$10 to S$12psf pm by 2010 and 2011. This is not surprising given that an office lease at the premises was recently renewed at S$13psf pm. Management estimated that The Atrium will provide property yield of 4.5% assuming all leases are renewed at S$10psf pm.
Has secured financing for the acquisition. Total acquisition cost of S$850m will largely be funded by 5-year S$650m convertible bonds fully underwritten by Goldman Sachs. The convertible bonds carry coupon of 1% with yield-tomaturity at 2% to 3%. Conversion premium is 20% to 35%. The balance of S$395m will be funded by its Medium Notes programme, which was already issued over the past two months.
High gearing a concern. CMT has grown its asset size from S$6b to S$6.9b via this acquisition and has revised its local target asset size from S$8b to S$9b by 2010. Gearing has increased from 35.3% to 45%. Management appears eager to move on to acquire Clark Quay (NLA: 262,230sf) and Orchard Ion (NLA: 660,000sf). CapitaLand is likely to monetise its investment in Orchard Ion once it is able to demonstrate stability of rental income. The injection of the two abovementioned assets will likely put a strain on financial resources given aggregate price tag exceeding S$3b. There may be some concerns that CMT has sidetracked from its focus on retail malls but management plans to progressively convert more office space into retail space.
Impact on earnings. We have revised our FY09 DPU forecast by 5.1% to 16.5 cents. We have factored in contribution of The Atrium as an office building and the impact of positive rental reversion. We are not able to assess impact of AEI as management did not provide guidance on construction costs involved. There may be government approval required to convert office space into retail space. CMT provides FY09 distribution yield of 4.71%. We have fine-tuned our dividend discount model to reflect risk of more fund raising exercises for the pipeline of acquisitions when both the equity and debt markets are fairly weak. Our new target price for CMT is S$3.72. Downgrade to HOLD due to limited upside.
MI-REIT – BT
MI-Reit’s distributable income rises
Q4’s $5.8m boosted by rentals from new properties
STRONG rental contributions from its new properties lifted Macarthurcook Industrial Reit’s (MI-Reit) distributable income in the fourth quarter to $5.8 million, with distribution per unit (DPU) coming in at 2.22 cents.
Q4 distributable income was 19.9 per cent higher than its initial forecast, while DPU was 19.4 per cent ahead of estimates.
‘The 19.4 per cent higher than forecast DPU for 4Q FY08 was largely due to rental contributions from our acquisitions of nine yield accretive properties during the year. Of these nine properties, five were acquired during the fourth quarter,’ said Craig Dunstan, chief executive officer of the manager for MI-Reit.
These acquisitions increased the total value of MI-Reit’s investment properties by 75.5 per cent to $555.4 million, compared with its initial portfolio value of $316.5 million, he added.
MI-Reit’s net property income for the fourth quarter ended March 31 stood at $8.21 million, 38.1 per cent higher than forecast. Taking an earlier revaluation gain from its 12 properties into account, its net asset value per unit (NAV) was $1.29 at the end of March, 7.5 per cent higher than the NAV of $1.20 at its initial public offer in April 2007, it said in a statement yesterday.
Annualised DPU came in at 7.91 cents for the full financial year, beating forecasts by 6.7 per cent. The annualised yield worked out to be 8.03 per cent, based on the closing price of $0.985 per unit at the end of March. Full-year distributable income also beat estimates at $19.61 million.
Properties acquired in the last six months include new warehouse and logistics facilities in Yishun Industrial Park A and Defu Lane 10, as well as a manufacturing complex in Kallang Way which was acquired through a sale and leaseback agreement with Xpress Holdings.
Besides lifting rentals, these acquisitions also helped to reduce the reliance on a single property or tenant, said MI-Reit. As testament to the results, it said no single tenant contributed more than 20.3 per cent to total rental income in March this year.
Looking ahead, Mr Dunstan expects economic growth in the region to be moderated as a result of the US mortgage crisis and this may put a temporary halt to MI-Reit’s acquisition plans. However, he expects demand for industrial properties to remain strong across Asia.
MI-Reit shares closed at 96 cents yesterday, down 1.5 cents.
FSL – UOBKH
New Acquisitions Boost Distribution Yield To 14.8%
First Ship Lease Trust (FSLT) has entered into a conditional agreement to acquire three 4,250 TEU container vessels from a wholly-owned subsidiary of Taiwan-based Yang Ming Marine Transport Corporation (YML) for a consideration of US$210m. The three vessels are scheduled for delivery to FSLT by end-May, end-June and end- October this year. The vessels will concurrently be leased back to YML on a fixed basis for 12 years.
Acquisitions significantly boost DPU. FSLT has guided that the acquisition of the initial two vessels will be significantly accretive to FSLT’s distribution per unit (DPU), raising DPU for 2Q08 to 2.77 US cents (from 2.05 US cents) and from 3Q08 onwards to 3.05 US cents (from 2.87 US cents).
No guidance on third vessel as funding not secured. While FSLT has not provided guidance on the DPU accretion for the third vessel as financing has yet to be secured (US$60m required), we estimate the potential accretion at 0.07 US cents per quarter from 1Q09 onwards (assuming similar debt financing and charter terms as the first two vessels). We have assumed similar charter terms for the third vessel and have factored the acquisition into our earnings calculations. However, until the financing terms are clear, we are not factoring additional accretion to DPU from the third vessel into our forecasts.
The paradox: Rising DPU but falling EPU. We continue to like FSLT for its stable and visible distributions that are supported by its long bareboat charters that have an average remaining lease term of 9.2 years. FSLT offers investors an interesting paradox due to its aggressive depreciation policy that depreciates its assets at 5-7% p.a. As such, while this latest acquisition is DPU accretive, EPU has plunged as earnings after interest for these vessels are less than the associated depreciation (2008: -65.6%, 2009: -93.3%, 2010: -93.3%). However, we remind investors distribution yield should be the focus for FSLT and maintain our BUY recommendation on FSLT with a target price of US$1.24 (S$1.61).